Note: This episode originally ran in 2015.
Sam Cohen's business works like this: He walks into a big retail store and buys a bunch of stuff. Then he sells it on Amazon for more. It's straightforward and surprisingly lucrative.
This is a multimillion-dollar business for Sam — and for lots of other people who do the same thing. It's called retail arbitrage.
How is this even a job, much less an industry? It defies something called the law of one price. That economic principle says that the same item should sell for pretty much the same amount of money everywhere it's available. If, say, a Nerf football costs $15 at Toys "R" Us, it should cost the same amount on Amazon. Because, if it's cheaper in one of those places, everyone will just buy where it's cheap. If it can sell for more on Amazon, why doesn't Toys "R" Us sell it for more there themselves?
In a lot of cases, the law of one price still holds. But Sam Cohen is an expert at finding the sweet spot: Products that he can buy in bulk at a physical store, and then resell online for a profit. He knows, for example, that a board game like Monopoly is a "commodity item" that he probably won't be able to make money on. It's available everywhere, and it'll probably have pretty much the same price no matter where you look. All those sellers are competing with each other, driving the price down. But a specialty box of Monopoly — say, a Game of Thrones-themed box — he could potentially sell for a profit.
Today on the show: We meet the modern middleman and we find out how he makes money doing something that should be economically impossible.
JACOB GOLDSTEIN, BYLINE: Sam Cohen is a businessman. He's in a business that until recently I didn't even know existed. So recently, I asked Sam if he'd show me how his business works. And he said, sure.
Where are we going right now?
SAM COHEN: We'll go to Toys "R" Us.
GOLDSTEIN: What are you hoping to find at Toys "R" Us?
COHEN: Anything we can make money on (laughter).
GOLDSTEIN: A big chunk of Cohen's business works like this. He walks into big-box stores - stores like Toys "R" Us. He gets a cart, he pulls stuff off the shelves, and then he goes up to the cash register and pays for it, just like any other shopper. Then he drives the stuff back to his warehouse and sells it for a profit on Amazon.
STACEY VANEK SMITH, BYLINE: And this is not just some guy clipping coupons as a hobby. Sam has a warehouse, about a dozen full-time employees. This is a multimillion-dollar business for Sam and for lots of other people. This is a thing people do now - buying stuff at stores and selling it for more online. It's called retail arbitrage. You can buy special software to do it. There are online tutorials that will teach you how.
GOLDSTEIN: Which - how is this even a job, much less an industry? I mean, how is it possible that you can build a business around buying stuff off the shelves of retail stores and selling it online for a little more?
SMITH: Actually, he's selling it for a lot more.
Hello, and welcome to PLANET MONEY. I'm Stacey Vanek Smith.
GOLDSTEIN: And I'm Jacob Goldstein. Today on the show - Sam Cohen is a middleman, and he's in the middle of a war. On one side, you got the giant big-box chains. On the other, you got Amazon. And in between them, there is Sam Cohen, driving around New Jersey in a beat up Sedan.
(SOUNDBITE OF BOXCAT GAMES SONG, "AGAINST THE WALL")
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SMITH: It seems like Sam's business and this whole industry should not exist because there is this thing called the law of one price, which says that if everything is working the way it should, the same product should have the same price everywhere. Like a Nerf football should cost the same at Target as it does as Toys "R" Us as it does on Amazon because if it's cheaper in one of those places, people will figure that out, and they will just go buy it where it's cheaper.
GOLDSTEIN: And in fact, the law of one price means Sam Cohen has a hard job. Most of the stuff at Toys "R" Us does sell for about the same price on Amazon. And Sam knows this, but he also knows that there's got to be something here - something right here in the store that he can make money off of. He doesn't know what it is, but he knows he can find it. We start walking through the aisles - me, Sam and one of Sam's employees, a guy named Jay Freiday. And Sam tells me why one thing after another is not going to work for him.
COHEN: Something like this, like a Graco car seat, is probably too big.
GOLDSTEIN: Really big things cost a lot to ship. So to pay for shipping and still make a profit, Sam would have to charge a ton. Around the corner, Sam starts looking at board games.
COHEN: Something that's a staple item like Scrabble, I don't think you'll ever make money on because it's a commodity item.
GOLDSTEIN: It's too popular, he says. Everybody sells Scrabble. And although sellers compete with each other, they keep lowering the price and lowering the price. There's no way Sam's going to be able to make a profit selling Scrabble. But on the shelf right below Scrabble, there are all these special Scrabbles.
COHEN: Deluxe Scrabble, Super Scrabble, "Frozen" Scrabble.
GOLDSTEIN: That's "Frozen," as in the Disney movie. Princess Anna and Queen Elsa are right there on the box. Games like "Frozen" Scrabble, Sam says, can be right in the sweet spot where they're not so popular that everybody's going to sell them and there's no profit, but they're popular enough that he can be pretty confident that he'll be able to sell it. Today, though, even "Frozen" Scrabble stays on the shelf. He's not going to buy it because this is the wrong season for Scrabble - for board games in general. They're basically holiday items.
COHEN: Right now, they're not on sale here. And it's April, so that doesn't make sense.
GOLDSTEIN: Finally, around the corner from the board games, Sam sees something promising.
COHEN: So this is interesting. This is a Babies "R" Us 800 baby wipes.
GOLDSTEIN: The wipes are on display in one of those great, big things right out in the middle of the aisle. They're selling for $16.99 - 17 bucks. I have, myself - I have two young daughters. I'm a price-conscious shopper, and I feel like I have some insight on the baby wipes issue, so I tell Sam...
Baby stuff, I know how much baby stuff costs.
COHEN: OK, is this a good price or a great price?
GOLDSTEIN: Not great, it's not great.
JAY FREIDAY: So you're going to thumbs-down this?
GOLDSTEIN: I'm going to - I'm going to say...
COHEN: Seventeen bucks for 800 wipes? It's a value buy.
GOLDSTEIN: I mean, buy it if you want. I don't think there's a lot of margin in it for you.
COHEN: I think you're wrong.
GOLDSTEIN: Sam and Jay take out their phones and get to work.
COHEN: So we scan the UPC bar code over here.
GOLDSTEIN: And right there on his phone, he can see all this information about how the Babies "R" Us 800 wipes value box is selling on Amazon.
COHEN: Basically, you see what category it's in. You see the size tier that it's in. You see the sales rank as compared to all the other items in the category.
GOLDSTEIN: You see how many people are selling it and, crucially, you see the price that it's selling for. So this box of wipes is selling for $17 here at Toys "R" Us. And on Amazon...
FREIDAY: This is currently selling for $46.
GOLDSTEIN: Wait a minute. People are paying - what did you say?
FREIDAY: Forty-six dollars.
GOLDSTEIN: For 800 baby wipes?
COHEN: Yeah. It's a lot?
GOLDSTEIN: It's a lot.
Even when you add up all of Sam's costs - shipping the wipes to Amazon's warehouse, the fees he's got to pay to Amazon to list the wipes on their site, the other fees he's got to pay to Amazon to ship the wipes again out to customers - even with all that, Sam figures he can make $14 in profit on every box of wipes. For some reason, the law of one price - that law that says the same thing should have basically the same price everywhere - does not seem to apply to this value box of 800 Babies "R" Us baby wipes. If Sam's right - if he actually can unload all these wipes at that $46 price - he'll make money. So Jay Freiday grabs every box of wipes in the display and puts them in the cart. Before we checkout, Sam spots a couple other things where he thinks he can make a profit.
COHEN: This is called a Little Tikes Big Digger Sandbox.
GOLDSTEIN: Jay grabs all the sandboxes and puts them in the cart. And one last thing...
COHEN: It's a slumber bag.
GOLDSTEIN: Like a sleeping bag for inside?
COHEN: Star Wars Rebels with a bonus backpack.
GOLDSTEIN: Jay puts all the sleeping bags in the cart, which is now overflowing with sandboxes and sleeping bags and wipes. Sam says this is actually just a small, quick trip. Usually they'd spend half a day and fill up a bunch of carts. Our cashier seems completely unfazed by this cart full of stuff.
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GOLDSTEIN: Sam pays for the stuff, and we take it out to the car.
A few weeks later, I called Sam back to see how he did with all his stuff because so far, he's bought the stuff, but he hasn't sold it. He hasn't made any profit on. And, you know, if nobody wants to buy from him on Amazon, he could be kind of screwed.
SMITH: But before we get to how Sam did, let's look at the Toys "R" Us side of this equation because if there is all this extra money to be made on baby wipes, why doesn't Toys "R" Us just raise the price in the store or why doesn't it just cut out the middleman? Why doesn't Toys "R" Us just sell baby wipes on Amazon itself?
GOLDSTEIN: Yeah, you know, I reached out to Toys "R" Us to ask them these very questions.
GOLDSTEIN: And I also reached out to Walmart and to Target and to Kohl's and to Home Depot, and not one of them agreed to be interviewed for the story.
GOLDSTEIN: Yeah. But there is this one story that's been out there in the news just in the past few weeks that suggests retailers are kind of freaking out about businesses like Sam's. The story involves Target and a clothing designer named Lilly Pulitzer. I learned about the story from Ina Steiner who writes a newsletter for people who sell stuff online.
INA STEINER: Target did a deal - a special deal. They collaborated with a designer called Lilly Pulitzer to come up with 250 different items that were special-made for Target.
GOLDSTEIN: Sundresses, flip-flops...
STEINER: ...Resort wear - very distinctive.
GOLDSTEIN: Does that mean palm trees? I don't know what that means. (Laughter).
STEINER: Very colorful, pastels.
SMITH: So people loved this stuff. They love Lilly Pulitzer clothes. And Target sold out almost immediately, except for a lot of people buying the stuff - all the dresses and flip-flops - were not actually people who were planning on wearing them. Almost immediately, these products showed up online marked way up, and consumers got really, really upset. There was this big outcry on social media. One lady said on Twitter that there is a special place in hell if you bought Lilly today to sell it on eBay.
GOLDSTEIN: (Laughter) Some real anger - that is some real Twitter anger.
SMITH: So much anger. Those flip-flops are cute, you know? People like them.
GOLDSTEIN: Target, of course, is on Twitter. Target has people who pay attention to this stuff, and they responded, and it wasn't just about Lilly Pulitzer. Ina Steiner started hearing stories - and this is just in the past few weeks now - she started hearing stories about resellers, about people like Sam Cohen who went to Target, filled up their cart took their - whatever - 20 identical boxes of Lego sets or something - up to the checkout, and when they get to the cash register, they're told, nope, sorry. We are not going to sell these 20 boxes of whatever to you. You can't buy them here.
STEINER: I reached out to Target, and they said they had changed their policy.
GOLDSTEIN: You had some particular language from Target that you had posted from a statement they sent you. Do you happen to have that? Can you just read that?
STEINER: Hang on. (Reading) In order to ensure we have the inventory of products to meet our guests' needs, we recently established a new policy that reserves Target the right to prohibit purchases to resellers.
GOLDSTEIN: So they're saying explicitly, if you want to come in and buy all our fancy new dresses so you can sell them online, we can say no.
SMITH: The big fear for Target here is that one day soon, there will be no reason at all to go to Target or Kohl's or Walmart or anywhere because you can just go to Amazon and buy it online.
STEINER: You cannot underestimate the impact that Amazon is having on retailers. Amazon is the 800-pound gorilla that every retailer has nightmares about.
GOLDSTEIN: This fear of Amazon explains a lot. It's a big part of the reason that Sam Cohen's business, this whole retail arbitrage world, exists. I mean, if Toys "R" Us wanted to, they could cut Sam Cohen and everyone like him out of the loop entirely. Toys "R" Us could just sell its own wipes on Amazon. But the last thing that Toys "R" Us wants is for shoppers to think of Amazon as the place where they can buy everything. Toys "R" Us does sell its wipes online. They just don't sell them on Amazon.
SMITH: And that creates an opportunity for Sam.
COHEN: Hi Jacob, how are you?
GOLDSTEIN: Good. How are you doing?
GOLDSTEIN: Awesome. OK, so a couple weeks ago we went to Toys "R" Us, we bought some stuff, and I want to see how you're doing with it.
Quick refresher - Sam had bought wipes, he'd bought sleeping bags, and he'd bought sandboxes. We started, of course, with the wipes.
COHEN: I believe we have one or two left. Most of them have already sold.
GOLDSTEIN: And what did you sell them for?
COHEN: We sold them for $45.
GOLDSTEIN: So I was definitely wrong about the baby wipes. I want to say that on the record.
GOLDSTEIN: You know, I made a really basic kind of rookie mistake, I think, in thinking about the wipes because, you know, here's the thing that I know. You can almost always find a giant box of wipes for around 20 bucks - 17 bucks, 20 bucks. And that's what I always bought. I didn't care what kind. I always just bought the cheap wipes.
SMITH: Yeah, I think you shop really differently from the way that I shop, Jacob, because when I was looking through my Amazon purchases, I noticed that I hadn't actually really looked at the prices that much. I'm sure at some point I looked at them, but I just wanted the thing now. I bought whatever could get shipped to me the fastest, and I think a lot of people work that way, especially when it comes to babies because people get very emotional about babies - probably also dogs, I would imagine. So if a product is for a baby, and it's a particular kind of wipe that the baby seems to like or respond well to, I feel like people will go out of their way to continue to buy that brand.
GOLDSTEIN: And when you need wipes, you definitely need wipes.
GOLDSTEIN: So, you know, you can go on Amazon, use your one-click, Amazon Prime, two-day delivery, and you want your Babies "R" Us 800 wipes, you pay your 45 bucks, and you get it - done. And it turns out, plenty of people, in fact, have done that. Sam was right about the wipes.
SMITH: And he was right about the Star Wars rebel sleeping bags, too. Apparently those are selling pretty well. But the last item, the little digger sandboxes...
GOLDSTEIN: The Little Tikes Big Digger Sandboxes.
SMITH: The Little Tikes Big Digger Sandboxes - those are actually becoming kind of a problem for Sam apparently. So he bought those at Toys "R" Us for 39.99, and he was hoping to sell them on Amazon for $75. That's a really big profit. The problem is after he bought them, the price started to fall on Amazon. Our middle man was getting undercut by other middlemen. He was getting out-middlemanned.
GOLDSTEIN: Just this morning, I looked at the price again. And as of this morning, that sandbox was selling on Amazon for $39.99, the exact same price Sam had paid at Toys "R" Us. So - at least as of this moment - for the Little Tikes Big Digger Sandbox, the law of one price seems to hold true.
(SOUNDBITE OF SONG, "LET IT GO")
IDINA MENZEL: (Singing) Let it go, let it go. I am one with the wind and sky. Let it go...
GOLDSTEIN: If you've got any hot retail arbitrage tips or just want to tell us what you thought of the show, you can email us at firstname.lastname@example.org.
SMITH: You can also follow us on Twitter. We are @planetmoney.
GOLDSTEIN: I'd like to think Chris Green, a retail arbitrage expert who actually talked to me from a Walmart that he had arrived at and was doing retail arbitrage. Chris, I'm sorry you didn't make it into the show. Also, thanks to Nick Fountain and Nadia Wilson for producing today's show. I'm Jacob Goldstein.
SMITH: And I'm Stacey Vanek Smith. Thanks for listening.
(SOUNDBITE OF SONG, "LET IT GO")
MENZEL: (Singing) Here I stand in the light of day. Let the storm rage on. The cold never bothered me anyway. Transcript provided by NPR, Copyright NPR.